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Hogs & Pigs Report 'Disheartening'

The opening line of National Hog Farmer’s March 2008 USDA Hogs and Pigs Report Review read: “If U.S. and Canadian hog producers needed any more cold water to shock them into full scale contraction, Friday’s Quarterly Hogs and Pigs Report from USDA ought to do it.”

Ditto that statement, today, as it applies to Friday’s June Hogs and Pigs Report, as well. The report may not be devastating, but it is certainly disappointing. Table 1 contains the key numbers from the report and they are undoubtedly bearish, with all but one larger than the average of the pre-report estimates and all near the top of the range of those estimates.

The most important aspect of the report is the continuation of huge slaughter numbers through 2008, before some reductions occur next spring. The market herd was estimated to still be 6.5% larger than one year ago, with the bulk of that increase being in the higher-weight categories.

The 180-lb.-plus category was pegged at 10.2% larger, 2.5% higher than the pre-report estimates. That difference would at once make one a bit suspicious of the report, especially when one compares the 10.2% increase to actual June slaughter that is up just less that 7%. The trouble is that you must adjust for the fact that last June had 21 weekdays and five Saturdays, while this June, to date, has had just 20 weekdays and four Saturdays. Additionally, it appears that about 90,000 to 95,000 fewer Canadian market hogs have come to the United States this June. After adjusting for those numbers, June slaughter is about 9.1% larger than last year and, while still a bit large, that 1.1% discrepancy between adjusted June slaughter and the 180-lb.-plus inventory doesn’t call the report into question, although the two heavyweight classes would indicate that there are plenty of hogs coming.

The lighter categories are a bit less burdensome, but still imply large slaughter runs in late summer. Further, the March-May pig crop, at +4%, is one of the very disheartening numbers regarding fall supplies and the prospects for better hog prices. The trade had expected about half that amount of pigs this spring due to smaller expected growth for both farrowings and litter size. Both of those came in at +2%, indicating that renewed productivity growth is still occurring. Further, the pace of that growth is apparently increasing.

The 2% growth in litter size is the largest since 1997, when litter size growth was mainly the result of rapidly changing industry structure and improving productivity when we were trading low-productivity farms for high-productivity farms. This year’s increase may be built on a bit of that as the sow herd declines, but most of the increase is attributable to growth in litter size on existing farms. The same goes for farrowings. Both factors are at least partially due to the use of circovirus vaccines.

The larger market inventories and lower imports of Canadian market hogs suggest that Q3 slaughter will be 7-8% larger and Q4 slaughter will be 3-4% larger than in 2007. Those slaughter levels will result in national net negotiated carcass-weight prices in the low to mid-$60s in Q3 and mid-$50s in Q4. Those forecasts use an elasticity of demand of -0.50, which is more favorable to hog prices than the one used last year (-0.33). Price-quantity relationships this year indicate that hog demand is more elastic.

Farrowing Cutback Coming Producers’ farrowing intentions indicate that cutbacks are in store. June-August farrowings are expected to be 2% lower, while Sep-Nov farrowings are expected to be 4% lower. In addition, imports of Canadian feeder pigs are falling as the Canadian breeding herd and pig crop are reduced. I believe these reductions will result in lower U.S. slaughter beginning in Q1-2009. My calculations show Q1-09 slaughter about 1.5% lower than that of Q1-08 and Q2 slaughter 4% lower. Those reductions should put national negotiated net carcass prices in the upper $50s in Q1 and near $80 in Q2.

Points to Remember Keep in mind these two key points:

None of these prices are even close to profitable! My projections for breakevens are well above $90 next summer. Losses this fall could be huge and these numbers don’t help that situation at all.

My price forecasts – and those of Iowa State University Economist John Lawrence (the only other one posted as I write this) are not nearly as high as are the Chicago Mercantile Exchange (CME) group Lean Hogs Futures. While none of the futures contracts on the board offers profits at today’s cash corn and corn futures prices, they do offer smaller losses than I believe producers are going to see in cash markets through mid-2009.

That opinion is not unanimous. There are some analysts that believe cash hog prices will be much stronger than I predict, mainly on the strength of export demand. Pork production is shrinking virtually worldwide in the face of high feed costs and export demand may indeed improve our situation. I hope they are correct, but as you can see above, I still believe cash hog prices will be far from profitable until at least the summer of 2010.